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The basic economic problem

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The basic economic problem In our modern day and age our human resources are becoming scarcer by the day; however our wants are becoming more and more infinite. It is because of this that we are forced to allocate our human resources so that all of our needs are met, and so leading to competition for resources. When there are several choices, not all of the choices will be able to be chosen, and other choices will have to be given up. The benefit lost from the next best alternative is called the opportunity cost of the choice. E.g. if we go to a shop and have a variety of chocolates to choose from the chocolates that we didn't choose would be the opportunity cost. ...read more.


This is another example of opportunity cost, the sacrifice of producing manufactured goods over non manufactured goods. We can show the amount of goods and services an economy is capable of producing by determining the quantity and quality of resources available to it. These combined with the state of technical knowledge will determine an economies production possibility. We can show an economies production possibilities on the diagram below: The curved line is known as the production possibility frontier, (PPF) and is showing the different combinations, and we can see how many goods it could produce if all of the economies resources were being used as well as full and efficient employment. We can see that at point: * A and E that all the resources are dedicated to either manufactured or non manufactured goods * B and D there is a combination of products ...read more.


If there is however an increase in the productive potential, then the PPF could move outwards, we call the increase economic growth. Economic growth can only occur if: * The resources available for production increases e.g. the number of workers in a factory or new offices * The quality or quantity of resource will increase e.g. technical progress allows machines and production processes to produce more with the same amount of resources There is also another way of drawing the diagram above, but instead of using a curved line there would be a straight line, this diagram is not as helpful as the PPF with a curved line because when we decide to produce more manufactured goods a curved line gives a better indication of how many goods can be produced if we need to give up some non agricultural goods. ...read more.

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